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Does the law of one price hold in China? Testing price convergence using disaggregated data

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  • LAN, Yuexing
  • SYLWESTER, Kevin

Abstract

This study examines to what extent prices diverge across China and how long it takes prices to converge following idiosyncratic shocks. We consider monthly data using disaggregated goods prices from 36 cities in China. Following [Imbs, J., Mumtaz, H., Ravn, M., and Rey, H., 2005. PPP strikes back: aggregation and the real exchange rate. Quarterly Journal of Economics 120, 1-44.], we use two estimation methods: a fixed effect method when considering goods individually and a mean group estimation specification for a panel including all goods simultaneously. The mean group method also accounts for dynamic heterogeneity across goods. Impulse response functions are obtained to calculate half-lives. With both methods, we find half-lives of only a few months or less, supporting the conjecture that convergence rates within a country are faster than rates estimated in an international context. However, the half-life reported here is still shorter than that for other studies using disaggregated intracountry data. Perhaps a lower degree of specialization and market differentiation in developing countries creates a greater potential for price convergence.

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Bibliographic Info

Article provided by Elsevier in its journal China Economic Review.

Volume (Year): 21 (2010)
Issue (Month): 2 (June)
Pages: 224-236

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Handle: RePEc:eee:chieco:v:21:y:2010:i:2:p:224-236

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Web page: http://www.elsevier.com/locate/chieco

Related research

Keywords: China Law of one price Market integration;

References

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Citations

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Cited by:
  1. Chao Li & John Gibson, 2013. "Spatial Price Differences and Inequality in China: Housing Market Evidence," Working Papers in Economics 13/06, University of Waikato, Department of Economics.
  2. Hengyun Ma & Les Oxley, 2010. "The Emergence and Evolution of Regional Convergence Clusters in China’s Energy Markets," Working Papers in Economics 10/14, University of Canterbury, Department of Economics and Finance.
  3. M. Ege Yazgan & Hakan Yilmazkuday, 2014. "High versus Low Inflation: Implications for Price-Level Convergence," Koç University-TUSIAD Economic Research Forum Working Papers 1412, Koc University-TUSIAD Economic Research Forum.
  4. Hasan Muhammad Mohsin & Scott Gilbert, 2010. "The Relative City Price Convergence in Pakistan: Empirical Evidence from Spatial GLS," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 439–448.
  5. Chao Li & John Gibson, 2012. "Rising Regional Inequality in China: Fact or Artefact?," Working Papers in Economics 12/09, University of Waikato, Department of Economics.
  6. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.

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